Yet the ubiquity of checks, cash, and credit cards sets the stage for a fierce competition.

"There's an entire panoply of different kinds of retail payment options that I think are going to be part of a pretty exciting era of experimentation," Mr. Ferguson said in a recent interview in the Fed's boardroom.

Consumers will need a reason to embrace new technologies.

"Any newer payment system mechanism is going to have to basically convince a critical mass of consumers that it has some characteristics - some combination of service and price - that makes it more attractive than the existing" forms of payment, he said. "That's a relatively high hurdle, because we have in many ways optimized and continue to optimize the check capability.

"It will be quite a while before they push this installed base of 68 billion checks out of the system."

In the meantime, the Fed is upgrading its check processing business, centralizing tasks currently done separately by its 12 district banks. By mid-2002, the Fed expects to have one national computer system to track problems in check processing so adjustments can be made faster.

While continuing to modernize check processing, Mr. Ferguson emphasized that the central bank supports emerging payment mechanisms, such as electronic bill presentment and smart cards. The Fed itself is experimenting with new forms of payment processing. To test emerging methods, the Fed has launched a pilot program with banks in Montana using electronic images to present checks to each another.

Mr. Ferguson said the Fed will "work with the industry, in a leadership role, to identify initiatives that the government and private sector could reasonably undertake."

To that end, last summer the Fed set up its Payment System Development Committee, co-chaired by Mr. Ferguson and Federal Reserve Bank of Boston President Cathy E. Minehan. The committee will ensure that the Fed's regulations do not hinder the ability of institutions to experiment. It will also consult with payment system providers on new technology.

Though upstarts initially appear to be competitors of banks, Mr. Ferguson predicted they will work together, especially because banks already have three key ingredients for success: experience, the trust of consumers, and an existing infrastructure, such as automated teller machine networks.

"The financial institutions have a great base to build on. This is going to be a case where there will be great competition, not just within these two separate industries, but also across them," he said. "There will be great points of cooperation. This is not necessarily a zero-sum game."

The creators of various payment mechanisms face one challenge that may be more daunting than any technological complexity: They must anticipate what people will want. Mr. Ferguson warns that nothing is a sure thing, noting for instance that highly touted smart cards flopped in a 1998 pilot program in New York.

"We shouldn't make the mistake of thinking that because the technology allows us to do it, therefore it is going to become acceptable," he said.

Likewise, simply making a credit card payment via the Internet just as safe, if not more secure, than passing plastic to a waiter, is not enough. Consumers must be convinced, and the size and scope of the U.S. market makes that tough.

"The challenge becomes translating any particular payment device that has worked in one economy to something as large, as diverse, as open and rapidly moving as the U.S. economy," Mr. Ferguson said. "If one looks around, you can say there are a number of payment devices that seem to work well, but to then say they will work well in the U.S., requires a leap of faith."

Noting that the year-2000 turnover went smoothly, Mr. Ferguson said the rest of the year should be uneventful as well, though there are certain days technology specialists are eyeing as potentially problematic for computers, such as Feb. 29.

Mr. Ferguson has a different kind of Y2K problem in that his term as a Fed governor expired Monday, but his appointment as vice chairman runs through October 2003.

Under the law, governors with expired terms may continue to serve unless they are replaced.

President Clinton did renominate Mr. Ferguson as a governor when he was nominated to be vice chairman last summer. But the Senate confirmed him as vice chairman without voting on his nomination for a seat on the Fed board.

That leaves Mr. Ferguson's nomination as a governor stalled in the Senate Banking Committee during an election year. Fed Chairman Alan Greenspan urged the committee last week to approve Mr. Ferguson as quickly as possible. The Senate could reconfirm Mr. Greenspan as early as today, but Senate Banking has no immediate plans to vote on Mr. Ferguson.

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